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Gentex Corp (NASDAQ:GNTX)
Q2 2021 Earnings Call
Jul 23, 2021, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Gentex Second Quarter 2021 Financial Results Conference Call. [Operator Instructions] After the presentation, there will be a question-and-answer session. [Operator Instructions]

I'd now like to hand the conference over to Josh O'Berski, Director of Investor Relations. Please go ahead.

Josh O'Berski -- Director of Investor Relations

Thank you. Good morning, and welcome to the Gentex Corporation second quarter 2021 earnings release conference call. I'm Josh O'Berski, Gentex Director of Investor Relations, and I'm joined by Steve Downing, President and CEO; Neil Boehm, Vice President of Engineering and CTO; and Kevin Nash, Vice President of Finance and CFO. This call is live on the Internet and can be reached by going to the Gentex website and ir.gentex.com.

All contents of this conference call are the property of Gentex Corporation, and may not be copied, published, reproduced, rebroadcast, retransmitted, transcribed or otherwise redistributed. Gentex Corporation will hold responsible and liable any party for any damages incurred by Gentex Corporation with respect to any unauthorized use of the contents of this conference call.

This conference call contains forward-looking information within the meaning of the Gentex safe harbor statement included in the Gentex reports second quarter 2020 financial results press release from earlier this morning and as always shown on the Gentex website. Your participation in this conference call implies consent to these terms.

Now I'll turn the call over to Steve Downing, who will get us started today.

Steve Downing -- President and Chief Executive Officer

Thank you, Josh. For the second quarter of 2021, the Company reported net sales of $428 million, which was an increase of 86% compared to net sales of $229.9 million in the second quarter of 2020. On a quarter-over-quarter basis, global light vehicle production in the Company's primary regions of Europe, North America, Japan/Korea and China increased 36% when compared to the COVID-19 impacted second quarter of 2020. However, when compared to the mid-April 2021 IHS Markit light vehicle production forecast in the Company's primary regions, actual light vehicle production in the second quarter of 2021 declined approximately 1.1 million units, or 7% as a result of industrywide part shortages and global supply chain constraints.

The largest deviation from the forecasted production within the quarter came in North America, which saw an actual light vehicle production decline in excess of 15% compared to the mid-April 2021 forecast. The reduction in light vehicle production compared to forecast was led by certain OEM customers that deploy high levels of the Company's product content, including both interior and exterior auto-dimming mirrors and other electronic features such as Full Display Mirror and HomeLink.

In total, the impact from the shortfall in vehicle production compared to forecast led to an estimated mirror unit shipment reduction of approximately 2 million units versus the Company's beginning of the quarter expectations.

While we are very pleased with the net sales increase of 86% over the COVID-19 impacted second quarter of last year, we are still experiencing tremendous volatility and order cancellations as our customers continue to deal with the impact of the ongoing part shortages that are affecting our industry. The initial forecast for the second quarter was for sales to be one of the largest quarters in the Company's history, but the continual changes and releases in orders resulted in the push out of approximately 2 million units.

The unit shipment changes were most severe in North America, where our dollar content per vehicle is above the corporate average. We estimate that the total impact to revenue in the quarter was about $80 million. As we move through the second half of the year and into 2022, we are encouraged that the overall demand for vehicles and our products should still provide opportunities for the Company to continue to outperform the underlying market.

For the second quarter of 2021, the gross margin was 35.4%, compared to 19.1% for the second quarter of 2020. Compared to the COVID-19 impacted second quarter of 2020, gross margins improved due to higher sales levels, significantly better overhead leverage, the structural cost savings put in place by the Company last year, and positive product mix.

While the gross margin for the second quarter of 2021 improved significantly versus last year, it was well below our initial estimates for the quarter. The lower-than-forecasted gross margin was primarily driven by the significant reductions in expected sales during the quarter, our inability to offset fixed and variable overhead costs due to the lower sales, lower-than-expected price reductions on raw materials, and higher-than-expected incoming freight costs. The good news however is that despite many of the challenges in the quarter, our analysis shows that if sales had hit our initial forecast, then gross margins would have been very close to our previous annual guidance range.

Operating expenses during the second quarter of 2021 increased by 2% to $51.7 million, compared to $50.7 million in the second quarter of 2020. Income from operations for the second quarter of 2021 was $99.9 million, compared to a loss from operations of $6.7 million for the second quarter of 2020. During the second quarter of 2021, the Company had an effective tax rate of 15% or $15.3 million, which was below our annual guidance range and was primarily driven by the benefit of the foreign derived intangible income deduction and discrete benefits from stock-based compensation.

Net income was $86.5 million for the second quarter of 2021, compared to a net loss of $2.4 million in the second quarter of 2020. The increase in net income was driven by the quarter-over-quarter increase in sales, gross margins and operating profits.

Earnings per diluted share for the second quarter of 2021 were $0.36, compared to a loss of $0.01 for the second quarter of 2020. The increase in earnings per share is the result of the higher net income when compared to the second quarter of 2020.

I will now hand the call over to Kevin for second quarter financial details.

Kevin Nash -- Chief Financial Officer, Chief Accounting Officer, Vice President of Finance, and Treasurer

Thank you, Steve. Automotive net sales for the second quarter of '21 were $420.6 million, an 89% increase compared to $222.1 million for the second quarter of 2020. Auto-dimming mirror unit shipments increased 98% during the quarter, highlighted by 140% growth in exterior-mirror unit shipments, compared to the second quarter of 2020.

Other net sales in the second quarter of '21 were $7.4 million, a decrease of 6% compared to $7.9 million in the second quarter of 2020. Within that, fire protection sales increased 31% quarter-over-quarter, while dimmable aircraft window sales decreased by 65% comparatively. The Company expects that dimmable aircraft window sales will continue to be impacted until there is a more meaningful recovery of the aerospace industry and the Boeing 787 aircraft production levels.

During the second quarter of '21, the Company repurchased 3.4 million shares of its common stock for a total of $115.9 million. The Company intends to continue to repurchase additional shares of its common stock in the future in support of the previously disclosed capital allocation strategy, but share repurchases may vary from time to time and will take into account macroeconomic issues, including the impact of the COVID-19 pandemic, market trends, and other factors that the Company deems appropriate.

I'll now highlight some key balance sheet items as of June 30, 2021 as compared to December 31 of '20. Cash and cash equivalents decreased to $353 million, down from $423.4 million, primarily due to cash flow from operations that was more than offset by share repurchases, dividend payments and capital expenditures. Short-term investments were $13.8 million, down from $27.2 million and long-term investments were $193.4 million, up from $162 million.

Accounts receivable decreased to $234.1 million from $284.9 million due to the decline in sales. Inventories were $263.9 million, up from $226.3 million. Accounts payable increased to $101.3 million, up from $84.8 million, primarily due to month-end payment timing and accrued liabilities were $95.1 million, up from $92.9 million. And increases were due to higher accrued salaries and wages, as well as accrued income taxes.

Now quickly looking at the cash flow statement. Second quarter 2021 cash flow from operations was $62.4 million, up from $39.2 million in the second quarter of last year. The increase in operating cash flow was driven by increases in net income, but partially offset by fluctuations in working capital. Capital expenditures for the second quarter were $18.8 million, compared with $13.3 million for the second quarter of 2020 and year-to-date capital expenditures were $31.4 million for '21 and compared to capital expenditures of $28.8 million in 2020. And depreciation and amortization for the second quarter was $25.9 million, compared with $27.1 million in the second quarter of 2020 and year-to-date was $51.5 million compared to D&A for 2020 of $53.4 million.

I'll now hand the call over to Neil for a product update.

Neil Boehm -- Chief Technology Officer and Vice President of Engineering

Thank you, Kevin. In the second quarter of 2021, there were 29 total launches of our interior and exterior auto-dimming mirrors and electronic features. Of these new launches, 45% contained advanced features, with Full Display Mirror leading the way.

Now for some updates on Full Display Mirror. We're excited to announce that during the second quarter of 2021, the Company began shipping Full Display Mirror 29th OEM Maserati. The Maserati MC20 now has Full Display Mirror, and we're excited to continue to grow this product across other vehicles in the future. Also during the second quarter of 2021, we began shipping Full Display Mirror on the Jaguar XF and the Buick Envision Plus for the China market. We're now shipping Full Display Mirror on 56 vehicle nameplates, and are forecasting at least 10 new vehicle nameplate launches for the second half of 2021.

It's been a few quarters since we provided an update on the number of OEM customers that have awarded us Full Display Mirror programs. As of the end of the second quarter of 2021, we've been awarded Full Display Mirror programs with 14 OEMs and we'll be announcing OEM 10 and 11 in the second half of this year. OEMs 12 through 14, we will be launching and brings to market the Full Display Mirror product over the next 2.5 years. Even with unique market situation we have been all facing, it's clear that our OEM customers and consumers value the benefits that a Full Display Mirror system provides to enhance rearview visibility and driver safety.

In summary, even with the current challenges our industry is facing, our product launches, product rollouts and new technology developments are continuing to help propel the Company forward and we're excited to see the impact of these over the coming years.

I'll now hand the call back over to Steve for guidance and closing remarks.

Steve Downing -- President and Chief Executive Officer

Thanks, Neil. The Company's current forecast for light vehicle production for the second half of 2021 and full years 2021 and 2022 are based on the mid-July 2021 IHS Markit forecast for light vehicle production in North America, Europe, Japan/Korea and China. Light vehicle production in the Company's primary markets is forecasted by IHS Markit to decrease 4% for the second half of 2021 versus last year. This forecast from IHS Markit assumes that many of the supply chain related issues that began at the end of the first quarter of 2021 and continue throughout the second quarter of 2021 will improve during the second half of the year.

While the vehicle production volumes saw reduction versus second half of 2020, this forecast represents a 9% increase in light vehicle production when compared to the first half of 2021. Based on this light vehicle production forecast, the Company is providing guidance estimates for the second half of 2021. Given the significant changes in vehicle production volumes in the second quarter and the associated impact on the Company's actual results and the challenges in our current operating environment driven by supply chain and freight issues, the Company believes that guidance specific to the second half of the year is more accurate and indicative of actual performance for the remainder of the year than only providing full-year 2021 updated guidance.

The Company also believes that this approach may help provide a more accurate projection for calendar year 2022 performance. The Company's current estimate is that net sales for the second half of 2021 will be between $970 million and $1.07 billion. This revenue forecast is based on the IHS Markit light vehicle production forecast for the second half of 2021, but also includes manual adjustments to the Company's forecast as a result of customer order changes stemming from part shortages that have impacted the second quarter and will likely continue to impact demand into the second half of this year.

The Company has also updated our cost and profitability model to include impacts due to elevated raw material prices, freight expenses and labor costs. The following guidance is intended to replace our previous guidance. Revenue for the second half of 2021 is expected to be between $970 million and $1.07 billion. Gross margins for the second half of 2021 are expected to be between 37.5% and 38.5%. Operating expenses for the second half of 2021 are forecasted to be approximately $105 million to $110 million. Our estimated tax rate for the second half of 2021, which assumes no changes to the statutory rate, is forecasted to be between 16% and 18%. Capital expenditures for the second half of 2021 are expected to be between $50 million and $60 million. Depreciation and amortization for the second half of 2021 is forecasted to be between $54 million and $59 million.

Based on the mid-July 2021 light vehicle production estimates for 2022, the company estimates that revenue for calendar year 2022 will be approximately 10% to 15% higher than the updated 2021 revenue estimates of $1.88 billion to $1.98 billion. We've updated our 2021 and 2022 guidance to include our expectations that the Company will continue to see headwinds to demand due to supply shortages that we believe will continue in the second half of 2021 and into the first half of 2022. Our forecast includes manual adjustments to the IHS Markit forecast for light vehicle production.

Despite the massive volatility in the industry, we are estimating that built up demand will provide strong revenue growth next year that is on pace with our initial revenue guidance for 2022. Our industry is enduring severe challenges currently, including issues in order cancellations, component shortages, raw material increases, freight issues, labor shortages and other pressures, but we remain optimistic that the next 18 months has the potential to produce record level revenues and profitability for the Company.

In conclusion, I'd like to take just a minute to thank the entire team at Gentex for their focus, hard work and immense flexibility during the quarter. The amount of last minute changes in customer orders, combined with the difficulty in receiving raw materials and the necessary volumes and timing made it very difficult to plan operations. But the team coordinated and worked very hard to keep up with the rapidly changing environment, which allowed us to continue our streak of meeting customer shipments without any major downtime for our customers.

We believe the challenges facing our industry will continue for at least another 12 months and our forecast assumes that overall light vehicle production will continue to see large changes and increased volatility. These headwinds will also continue to affect the overall profitability of the Company, but much of the work we did last year on cost controls has prepared us for the difficult conditions we're currently operating under. Despite these challenges, our forecast for the rest of 2021 and 2022 remain strong.

As I mentioned during the first quarter conference call, the combination of our launch cadence, product mix and overall program awards continue to provide us confidence about the future growth rate and health of our business.

That completes our prepared comments for today. Thank you for your time and we can now proceed to questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from James Picariello with KeyBanc Capital Markets.

James Picariello -- KeyBanc Capital Markets -- Analyst

Hey. Good morning, guys.

Steve Downing -- President and Chief Executive Officer

Good morning, James.

James Picariello -- KeyBanc Capital Markets -- Analyst

Can you start by -- maybe just quantify the actual semiconductor in premium freight costs in the quarter? I believe the number was $6 million or so last -- in the last quarter. So curious how that trended? And then can you share what you now have baked in for the second half? Does the cadence alleviate by the fourth quarter? And how should we start thinking about these extraneous costs persisting next year within the cadence for the second half? Thanks.

Steve Downing -- President and Chief Executive Officer

Sure. So the -- what we've seen in the first half is a little lower than what we're expecting in the second half. But if you look at kind of what the premium is on electronics right now versus what it would have been last year, the first half of this year is probably 50 basis points to 100 basis points. The second half, we're expecting to be 100 basis points to 150 basis points and that's talking gross margin impact. The freight is right around 100 basis points on the gross margin. And just to point that out, that's all incoming freight costs, which is what impacts the gross margin line. There is also expedited freight costs on the outgoing, which affects our sales expense.

James Picariello -- KeyBanc Capital Markets -- Analyst

Okay, got it. And then as we think about next year then, is the second half gross margin guidance of 37.5% to 38.5%, is that a good starting point in terms of thinking about gross margins for next year?

Steve Downing -- President and Chief Executive Officer

Yeah, we think that's pretty much probably going to be in line. The only reason why we say that it's been very volatile environment when it comes to pricing on the semiconductor side. But we believe most of the negative impacts will be hitting in the second half of this year. So, we don't expect additional starting in 2022 at this point.

James Picariello -- KeyBanc Capital Markets -- Analyst

Okay. And just a follow on to that. I mean what are the levers that could swing that one way or the other in terms of -- you'll have your annual price reductions with your OEM customers at the start of the year and then you'll be negotiating on the -- on your supply -- on your trip supply base to get concessions there. Just how should we be thinking about the dynamics?

Steve Downing -- President and Chief Executive Officer

Yes, I think, I mean the single biggest dynamic and the single biggest negative impact this quarter was just the lost sales. So really the thing we're watching the most is unfortunately somewhat out of our control, but that is what other Tier 1 suppliers are struggling that are causing OEM downtime issues. If the OEMs are up and running, based on our forecast, we're going to be in great shape throughout the second half and in the next year.

So that would be the single biggest thing to watch is, how close do we come to our revenue estimates. From there, it's about the factors that you mentioned, right. How do lengthening of time to get parts into space? How do we get them into our facilities and then at what price point? So if we can handle that first half and sales actually hit and we feel pretty confident on our ability to manage the expenses around the price increases and the freight expense.

James Picariello -- KeyBanc Capital Markets -- Analyst

Thanks, guys.

Steve Downing -- President and Chief Executive Officer

Thank you.

Kevin Nash -- Chief Financial Officer, Chief Accounting Officer, Vice President of Finance, and Treasurer

Thanks, James.

Operator

Our next question comes from Luke Junk with Baird.

Steve Downing -- President and Chief Executive Officer

Good morning.

Luke Junk -- Baird -- Analyst

Good morning. So first question I want to ask is on China. So you said that China sales increased significantly in both the first and second quarter now. So it does seem like we're seeing some sustained momentum there. While I know it was a negative from mix this quarter, if we take a step back and look at the Company's strategic positioning in China, wondering how you're feeling about that today versus say a year or two ago, or do you feel like you're on the front foot in China now?

Steve Downing -- President and Chief Executive Officer

Yes. See, I would say we're definitely making great progress in the China market. If you back up five years ago, I'd say we're a little bit behind in the China market versus where we should have been. And so, in the last few years especially, we've made tremendous progress. So these are -- what we're launching and the sales increases or awards that we were given two to three years ago and just going into production now. So, we're definitely excited about the opportunities of the China market and it's good to see their production levels returning to normal.

Luke Junk -- Baird -- Analyst

Next question I wanted to ask is in terms of the disclosure that you gave us on the 14 OEMs that are now on board for the Full Display Mirror. So I know we're not going to get anything specific here. But I'm just wondering if there is anything in way of commonality for looking at geography, market segment, or similar? Just trying to get an idea of where you're seeing momentum in terms of bookings on the FDM?

Neil Boehm -- Chief Technology Officer and Vice President of Engineering

Yeah, actually it's broad spread. You see markets in luxury vehicles down to volume vehicles and everywhere from standard fit on a vehicle to optional take rate. So it's -- I wouldn't say that it's particular segment or a particular region, because we've got vehicles that have launched in China with it, the Buick Envision Plus is Chinese market. We've got Japanese-based products. Europe has been picking up for the European market. And of course, North America is where a very large portion of it is. So we're seeing growth in outside of North America lately.

Luke Junk -- Baird -- Analyst

Great, thank you. And If I could just sneak one last question in on gross margin, hoping to put it in context of your second half guidance relative to sort of the typical seasonal pattern that we'd see at Gentex and specifically what I'm wondering is to what extent can the normal activities that you would undertake to offset annual [Phonetic] price downs help to address these pressures that we're seeing right now in terms of material and freight costs?

Kevin Nash -- Chief Financial Officer, Chief Accounting Officer, Vice President of Finance, and Treasurer

Yeah, I think we are seeing still have positive cost reductions. But the electronics content is kind of muting it out a little bit to that, tune of about 100 basis points or 150 basis points in some cases. So that's really what is offsetting kind of our seasonal ramp. Now if sales come in as forecasted, that should help offset it. But I think we're talking about a little bit of a discount to what the IHS forecast is showing. So that also was a negative, little bit of a negative on the gross margin that would -- that should -- would be offset in the second half.

Steve Downing -- President and Chief Executive Officer

I think -- to Kevin's point, I think the big increase from Q2 actuals to the second half guide, really what you're seeing there is the impact of the higher sales levels that we're anticipating in the second half of this year.

Luke Junk -- Baird -- Analyst

Great. Appreciate the context there and I'll leave it there. Thank you

Steve Downing -- President and Chief Executive Officer

Thanks, Luke.

Kevin Nash -- Chief Financial Officer, Chief Accounting Officer, Vice President of Finance, and Treasurer

Thanks, Luke.

Operator

Our next question comes from Ryan Brinkman with JPMorgan.

Ryan Brinkman -- JPMorgan -- Analyst

Hi, good morning. Thanks for taking my question.

Steve Downing -- President and Chief Executive Officer

Hi, Ryan.

Ryan Brinkman -- JPMorgan -- Analyst

Hey. We've heard from a couple of other suppliers that the recent industry backdrop has been distracting as management time and attention has had to be diverted away from long-term projects and initiatives instead toward putting out various fires like figuring out increasingly tricky logistics and sourcing. I know you guys seemingly more than most other suppliers are always working on long-dated projects, concords like medical, etc. And so, I thought to ask about your experience in continuing to execute against your long-term projects, including new products under development, the ability to pitch new ideas to customers who made themselves to be distracted etc. I guess, what was your experience kind of walk in and chewing gum in the second quarter and then how do you see the outlook for the same in the back half?

Steve Downing -- President and Chief Executive Officer

Yes, that's actually a great question, Ryan. Thanks for asking. As you can imagine, the backdrop is distracting. However, we continue to make great progress on the skunk-works types projects that we always have going. A lot of those are looking at verticals outside of our traditional vertical, and we feel very comfortable in our ability to continue to do both of those at the same time.

The one thing I'll point out is on our existing book of business, having a forward facing conversation with an OEM, whether that's an aerospace or an automotive, has become more difficult, not just because of the environment what's going on in part shortages and downtimes, but also because of the lack of travel on ability to go internationally and see our customers face to face. But, that hasn't stopped us. Our sales teams on the ground in those countries have done a great job, continuing to show the new product concepts and what we're working on. What we're excited about the second half of this year and heading into next year, we're fully anticipating being able to do see us again and we're pretty excited to build to show some new product concepts at that show.

Ryan Brinkman -- JPMorgan -- Analyst

Okay, helpful. Thanks. And then just, what has been the early experience here in the first few weeks of 3Q relative to the supply chain constraints that you've talked about the volatility in the customer production schedules, etc.? Are you seeing any, or do you expect any improvement in these issues in 3Q versus 2Q, perhaps on the cycling past of the Renesas fire or any other issue, I was just curious if maybe you said some of the customers that were negatively impacted had higher take rates etc. So I was just thinking, I don't know F-150 or anything like that and maybe those customers that were disproportionately impacted in 2Q, maybe that was because of Renesas and there could be some improvement. I don't know what you're seeing.

Steve Downing -- President and Chief Executive Officer

No, I mean, really what we're seeing in July is pretty much a continuation of what second quarter look like. So what we believe will happen is, issues will continue to exist in the second half and then into next year, hopefully just not as dramatic. In other words, Ford being down for as long as they were, some of the other Detroit 3 really struggling with communication and data.

I think what will happen in the second half of this year is not that there won't be problems and when we talk about problems, it is not really limited to one supplier. It is really kind of rolls every day. You find it, get a call, it's a different, different supplier, a different problem and so unfortunately it's inconsistent. You have to adjust each one of them. But one of the things that we believe will happen and has starting to happen as communication in the industry is getting better.

So the suppliers are communicating with OEMs more effectively. Our suppliers are communicating with us more effectively. And if nothing else, that gives you a better chance to plan and to react. So even though we believe those continue to be shortages, we think the amount of time you have to spend on it will start to shorten.

Ryan Brinkman -- JPMorgan -- Analyst

Very interesting and helpful. Thank you.

Steve Downing -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from David Kelley with Jefferies.

David Kelley -- Jefferies -- Analyst

Hi. Good morning, everyone. Thanks for taking my questions. Maybe just starting with the advanced feature take rate. It was a bit more resilient than we expected, just given the ongoing headwinds. So just curious what you're seeing customers prioritize and has that or do you think that's changing into the back half of the year, given the lingering disruptions?

Steve Downing -- President and Chief Executive Officer

Yes, I think most OEMs in general, especially at the end of Q1 and really throughout Q2, if they had a preference, they're going to build the highest end vehicle they can. And that's been an interesting transition. There has been a lot of vehicles and there's a lot of articles about this, where OEMs are dropping certain features if they can get the support from the supply base to produce it. They'll build the vehicles still, maybe with 90% of the content that it would have had.

So the bet is toward the high end. By the second half of this -- of the second quarter, really so in the May-June, what you started to see where OEMs basically saying, OK, what can you get us if anything, right? Now it's -- we prefer to build high end, but to be honest, we'll build anything as long as we can get components.

So I think there was a certain level of desperation at the end of the Q2 for all of us on the supply side and the OEM side, just trying to put together a plan of what can we get you that will allow you to build a vehicle in general. And so, I think there is a little bit more of that we've to get through here in Q3, and then hopefully, gets a little better in the back half of the year.

David Kelley -- Jefferies -- Analyst

Okay, got it. That's helpful. Maybe just a follow-up. A medium-term question, but is there better visibility than average to the out here kind of advanced feature take rate, if we think about dealer inventory levels where they are added and OEMs scrambling to content vehicles? Just curious of the medium-term visibility. It could perhaps even be better than we'd historically see, despite some of the shorter term headwinds that are out there.

Steve Downing -- President and Chief Executive Officer

Yes, I think OEMs are doing a better job of trying to provide you information about what their intentions are, or what they want to build further out to help with this issue of planning. The problem is that so far that information hasn't been very useful because it's too optimistic. And unfortunately, the supply base can't support those levels. So as much as every day -- like I mentioned, the communication is improving. Unfortunately, it hasn't really turned into reality yet. But I think in the next 12 months or so, that will start to turn the corner and the information is being provided will be quite useful.

David Kelley -- Jefferies -- Analyst

Okay, got it. Thank you. And then, maybe one last one, if I could sneak it in. A potential FDM competitor announced a significant ADAS acquisition last night. So, just curious if you have or maybe you are seeing any changes in the FDM competitive landscape or prioritization by potential competitors that are out there?

Steve Downing -- President and Chief Executive Officer

No, we don't think -- we don't think that acquisition changes the FDM landscape at all. I mean, if you look at what that is focused on, it's totally different technology and isn't really in our feature set of any of our FDM products.

David Kelley -- Jefferies -- Analyst

Okay, got it. Thanks everyone.

Steve Downing -- President and Chief Executive Officer

Appreciate it.

Operator

Our next question comes from John Murphy with Bank of America.

John Murphy -- Bank of America -- Analyst

Good morning, guys.

Steve Downing -- President and Chief Executive Officer

Good morning.

John Murphy -- Bank of America -- Analyst

I had a question about the second half and I'm certainly not trying to give you guys a hard time because this is very volatile time and it has nothing to do with what you guys are controlling at the moment. But I mean, how comfortable are you with these volume forecast going forward? I mean because -- I mean, we are hearing and I'm sure you're hearing conflicting views of like chips are coming back, but maybe they're -- maybe they're not depending on they're talking to you and maybe volumes are increasing, but some of that volume increases being allocated toward consumer electronics and cellphones more than the auto industry. So the supply actually really might not be getting better in the second half of the year. And it seems like despite they are not being a lot of chips around, there is almost some pull forward. And I think you actually kind of just alluded to this from the third quarter into the end of the second quarter, but then that started to dry up at the end of the second quarter.

So it's just -- there's just a lot going on here and there is not a clear picture as to exactly how to chip shortage is going to resolve itself in the second half of this year, hopefully will next year. I mean, how confident are you in these numbers for the second half? And once again, I'm not giving you hard time because this is the volatility in the semis industry, not the autos or even what you can control?

Steve Downing -- President and Chief Executive Officer

Well, no, it's a good question, John, and we're not offended by it. In fact, it's the million-dollar question that we're trying to answer every day. What I would say is, if we do a bottoms-up forecast based purely on IHS Markit, our estimates for the second half would be much higher. We reduced those based on the change in demand that we're seeing from our customers. So, we got a pretty good quarter. I mean, I don't say pretty good quarter, pretty good information in the quarter at least to give us some indication of how much volatility and likely order changes.

So, what we are also comparing that against is, what are we hearing from our suppliers on the silicon side in terms of what can they hit in the second half versus the constraints they had in the first half. And so, we do see some lightening. That also includes a tremendous amount of work that our team has done here to change product concepts and designs to make sure we're getting out of more constrained components and into others. So in the background of all of this, we've been doing a tremendous amount of work on redesigning circuit boards, relaying out designing around components that have more availability.

These are all very quick turn engineering projects, expedited testing procedures and then obviously coordinating with OEMs on approval for all that. So it's not just that we're sitting and waiting for supply to get better. We're also actively redesigning products to try to get out of those constrained areas as much as possible. And that's what gives us a little more confidence in the second half than what we had in Q2.

John Murphy -- Bank of America -- Analyst

Got it. Okay, that's very helpful. And then, the second thing on the variable cost side, I mean obviously, if you had better visibility and even if schedules were not good, but if they were steady and predictable, I would imagine you could respond a whole lot better than you did in the second quarter. I mean if we saw something more normally in the second quarter as far as the shipments that you saw with some level of predictability, what is your ability or how could if you reacted on the variable cost side that would have been much more effective than what you got jammed with the variability?

Steve Downing -- President and Chief Executive Officer

Yeah. If you look at -- I'll kind of combine two things. One of them is what is the profitability of the loss business plus the overhead benefits, if we could have planned better and just having better leverage and that would have been 200 basis points, 250 basis points by itself between those two areas. So that's why we look at the second half saying we don't need it to be a record-setting quarter from a revenue standpoint to get back to that profitability measure we gave, despite the headwinds on the raw material side and freight. What we need is just enough visibility and then high enough level of sales that gives us that leverage point.

John Murphy -- Bank of America -- Analyst

Okay. And then just lastly on the raws. It sounds like they didn't go up, but they were not. They were a little bit worse than you were expecting in the quarter. As you look at the second half of the year, I would imagine, I mean you're saying that they're getting a bit tougher and increasing. As you go into 2022, is that still an issue in the first half and it might ease in the back half of the year? I mean there is -- once again, it's another volatile factor, but it does seem like as supply comes on there on the raw mat side, you may actually get some easing sometime in 2022. What's your take on that? What's happening in the near-term and what's your take [Speech Overlap] guidance for 2022?

Steve Downing -- President and Chief Executive Officer

Sure. Yeah, the second half of this year, we're estimating and really into next year, about 100 basis points to 150 basis points of gross margin headwind based on raw material increases. And that includes the semis, but it also includes a lot on the metal side and the precious metal side that affects our coding and a lot of what we do on the display side. So that's kind of our estimates for the second half of next year. We don't really see that easing anytime next year. We think 2023 would be the first time before you start to hopefully have some stability and then some more -- more normal type conversations around long-term productivity from the supply base.

John Murphy -- Bank of America -- Analyst

I'm sorry, on a comparison basis though, so this kind of pressure would consist -- would continue into the first half of 2022, then on a year-over-year basis, would that potentially ease because you're raising it or you expecting...

Steve Downing -- President and Chief Executive Officer

Yeah, on a year-over-year, on a comp basis, absolutely, because we're expecting a lot of that to hit in the second half of this year. So in the second half of next year, you'd already have some of that incorporated into your cost structure. So you wouldn't expect a full in Q4 -- in essence, next year, you wouldn't expect a full 100 basis points to 150 basis points again. It would just be the increment -- whatever changes in the second half of next year.

John Murphy -- Bank of America -- Analyst

Okay. That's great, helpful. Thank you guys.

Steve Downing -- President and Chief Executive Officer

Thank you, John.

Operator

Our next question comes from Josh Nichols with B. Riley.

Josh Nichols -- B. Riley -- Analyst

Yeah, thanks for taking my question. I know there's a lot of uncertainty around the semiconductor supply chain right now. But clearly, you guys are seeing a lot of traction with the full display mirror offering, a lot of new nameplates that are launching here. Are you in a good position? Any impact there as far as your ability to continue to supply those offerings? And it's also been a very favorable gross margin contributor, or is there any major impact there? Is there still a lot of favorable gross margin impact that you're seeing in that business? Just curious about the growth trajectory there in the margin profile, there has been any change on that business.

Kevin Nash -- Chief Financial Officer, Chief Accounting Officer, Vice President of Finance, and Treasurer

On the product side, FDM is one of the more challenging products because of the amount of electronic content in that product. So getting components and then also making sure you're managing through the headwinds on price increase side. So LCDs, especially drivers for LCDs have been -- it will continue to be really for the next 6 months to 12 months a cost issue, as the industry is facing cost increases on those type of components. But also, obviously on the large-end microprocessor side, which is in -- inside all of our FDM products. So that product has been incredibly popular. At the same time, it's difficult to get those components and then it's one of the challenges controlling the cost structure of that product as well.

Steve Downing -- President and Chief Executive Officer

But as we continue to launch FDM, we're typically moving out of base mirrors into FDM, which has a higher price point and does have higher margins overall. So incrementally, it is a benefit to the corporate overall margins.

Kevin Nash -- Chief Financial Officer, Chief Accounting Officer, Vice President of Finance, and Treasurer

And that will continue to go up, despite these issues.

Steve Downing -- President and Chief Executive Officer

Thanks, Kevin.

Josh Nichols -- B. Riley -- Analyst

Thanks. And then just separately as a second question here. I know that you trimmed your IHS estimates a little bit I assume as far as geographically as most of that cutting that you're seeing in North America relative to outside the U.S. and then while supply is a little bit challenged right now, it seems that there is very low inventory levels, right, overall. Curious about your take whenever we think a little bit more about next year hopefully things start to normalize to some degree. How long it may take for these OEMs to kind of rebuild the inventory levels, given that the demand for vehicles is actually quite high right now?

Steve Downing -- President and Chief Executive Officer

I think you're 12 to 18 months before OEMs can reasonably get back to the inventory levels they would like to be at. Like you said, from a backdrop standpoint, it's actually exciting. I mean, there's very low inventories, which -- historically in our industry, problems have always been around too higher than inventory levels and what impact do that have. So honestly, I can't tell you the last time inventory levels have been this low. So that -- if you look at the big picture, the fact there's low inventory levels and great demand from the consumer side and also for our products in particular, that's what gives us the confidence that the next couple of years should be a great opportunity for us to continue to grow and focus on profitability.

The bigger picture is, when does it finally start to lessen and when can OEMs start to play catch-up on the other issue is even as suppliers catch up immediately, it's difficult for an OEM to ramp up capacity in a short time period. And so, I think that's the one that we would tend to say it's going to take much longer for inventory levels at the OEM level to get back to where they would like them to be.

Josh Nichols -- B. Riley -- Analyst

Great. Thanks, guys. I'll hop back in the in the queue.

Steve Downing -- President and Chief Executive Officer

Great.

Kevin Nash -- Chief Financial Officer, Chief Accounting Officer, Vice President of Finance, and Treasurer

Thank you.

Operator

[Operator Instructions] Our next question comes from Mark Delaney with Goldman Sachs.

Mark Delaney -- Goldman Sachs -- Analyst

Yes, good morning, and thank you for taking the questions. I guess first on the input cost increases that you talked about and some of that potentially being sustained into next year. Could you talk about what capability you think you may have to be able to pass some of these higher cost in terms of raw materials and freight on to OEMs that you start going through these negotiations and perhaps neutralize the impact to your margins as you think about 2022?

Steve Downing -- President and Chief Executive Officer

Yeah typically, I mean, we're a market-based pricing company. So a lot -- we don't have contracts that would dictate if raw materials go up by 10% that we get to pass those along. But every year is the new year from annual customer price reductions negotiations. And so, putting those cost increases into our argument as far as like negotiating more price downs, it's typically our best argument in how we approach it on an annual basis. So we have those conversations. We're having those conversations about last year still with some OEMs because obviously volumes didn't live up to the expectations. And so, that's really our best chance of kind of offsetting the increase in raw materials is getting a lower price down average at a given customer going into next year.

Mark Delaney -- Goldman Sachs -- Analyst

Got it. That's helpful. And then, in terms of the outlook the Company was giving around light vehicle production expectations for 2022, I believe the number of units the Company is expecting is pretty similar this quarter compared to what you had last quarter around 76 million [Phonetic], and you're talking about the potential for some of these chip shortages to be sustained and still causing some degree of difficulty next year. So is that something you're already trying to take in even last quarter into the '22 outlook and that's why it hasn't changed or is there some other puts and takes that are allowing you to maintain a similar volume outlook for 2022?

Steve Downing -- President and Chief Executive Officer

The published IHS numbers -- we didn't change those and changed that in our press release, but we're talking about our topline forecast that we're discounting that. And when we provide our revenue guidance, it's got our internal kind of manual adjustments in there. So we still publish what IHS is for the regions just for a benchmark. But just anecdotally talking about, we're discounting it, so that it helps with the modeling going out.

Mark Delaney -- Goldman Sachs -- Analyst

Got it. That's helpful. And then maybe just one last one. As you're thinking about the second half of the year, you've already given some helpful color on how you're hearing from customers about the build schedules and how that may ramp up. But if you tell [Phonetic] a little bit more about the linearity in the second half goals in terms of where you are running at today and how that starts to improve. Yeah, I understand it's still tight throughout the whole second half, but to what extent later 3Q, maybe it gets better, or is it -- or is it really more of a 4Q phenomenon before you think absolute volumes start to increase? Thanks.

Steve Downing -- President and Chief Executive Officer

I think...

Kevin Nash -- Chief Financial Officer, Chief Accounting Officer, Vice President of Finance, and Treasurer

Go ahead.

Steve Downing -- President and Chief Executive Officer

I'll say the first half of Q3 is going to be much -- very similar to Q2. And we think as Q3 progresses is when you're going to see our first opportunity for things to start to get better. Typically, Q4 is a little lighter than Q3. And so, if you look at holiday down times and some of the things that OEMs have done historically, we think there's going to be a lot of changes to that and the OEMs are going to be more aggressive Tier 1s as well in terms of working through the fall and into the winter. And so, we think there is upside especially in Q4 to what's going on because historically if you look at what's going on right now, right, I mean on the consumer electronics side, you've got a lot of builds happening right now to get ready for the holiday season.

Once you get into Q4, there should be a lightening in demand on the consumer electronics side versus what's happening right now. And that will obviously would hopefully free up some capacity for automotive and other industries. But that's kind of our expectation is that Q3 is going to start basically like Q2, and then hopefully it continues to get better throughout the end of the year.

Mark Delaney -- Goldman Sachs -- Analyst

Thank you.

Steve Downing -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from David Whiston with Morningstar.

David Whiston -- Morningstar -- Analyst

Thanks. Good morning. Wanted to go to a comment, Steve, that you made earlier in the Q&A that -- to me implies that there has been some maybe inadequate communication from the OEMs to the suppliers. And I realize OEM supplier relationships are a bit of a soap opera. But how on earth that there is still poor communication going on after so many decades of working together and how serious this chip issue is?

Steve Downing -- President and Chief Executive Officer

I think it's less to do with intentional poor communication and more about what OEMs were planning to do this entire time, what they wanted to do, and then not hearing -- I mean, what happened really is during the quarter as a lot of our suppliers told us at the last minute or we found out when a shipment didn't arrive that we were short of components or never shipped.

And so, a lot of suppliers were dealing with the same problem, which is poor communication from the supply base. And then suddenly you realize you have a problem. You're trying to find out are you going to get the parts or you not? What kind of volumes? And then, that information led upstream to the OEMs later than it should have. And then they had to make decisions with it too.

So, it's not that it was a deliberate -- deliberately poor communication. I would argue that it's actually gotten a lot better over the last few years and has gotten better during this. The issue is that on the supply side. Especially on the silicon side, there is a lot of last minute information coming in. There are a lot of short ship and no shipments that happened that obviously took a few weeks.

And then what happens is obviously, once the information matriculates up to the top and OEM then has to make a decision and then that has to work its way back down, problem is that they change what they wanted, now you have to like redesign your entire production process around what part number they want, when do they want it. And so, I wouldn't blame this on the OEMs. I would really say it was kind of a bottom-up issue on from the supply base that cost OEMs to struggle with these issues.

David Whiston -- Morningstar -- Analyst

So the last minute changes are those coming from the OEM or from upstream for you?

Steve Downing -- President and Chief Executive Officer

Well, it started with the Tier 2, 3, 4 supply base. And that was really driven by -- still playing catch up from last year shutdowns all over the world. If you look at the supply chain for an electronic component, it's a very complex, very drawn-out process. It goes through -- especially on a microchip side, it goes through multiple countries and a lot of areas. And so, that cause a lot of problems. Each of these countries going on shutdowns at different times cause tremendous and still dealing with them causes a tremendous backlog in information and processing.

And so, that started really on the supply side, a multiple levels below Tier 1s and then obviously has impacted everything above it. And that communication historically hasn't been as good as it necessarily should have been on a Tier 2, 3 or 4 basis. And I think that's where the Tier 1s ended up struggling and then obviously causing problems for the OEMs at the last minute.

David Whiston -- Morningstar -- Analyst

So given what you just said, is that why in the press release, you don't say shipper semiconductor shortage and you are saying part shortage?

Steve Downing -- President and Chief Executive Officer

Well, yeah, because it's more than just that. I mean, other things that affected us is, OEMs were struggling with plastics at times, foam for seats. There has been multiple different commodities that have been affected by this. And ultimately, those didn't affect us directly and that we didn't have foam that we needed to put in a mirror but what did happen is, there is an OEM can't get the seats that they need or a certain component whether it's plastics or leather, they are changing what they're going to build or not build in that case.

And so, that causes an OEM to go down, meaning we are planning to build. We might have even built the component for them and then at the last minute, they are like, you know what don't ship it because we don't need it. Because we're not going to be able to build those vehicles right now. And so, the reason why we talk about shortages in general is because we're aware of all those different commodities causing problems in the industry. It's not just electronics.

David Whiston -- Morningstar -- Analyst

Okay. That makes sense. And then probably for Kevin, but there is a chance that Biden administration is going to raise U.S. federal tax rate and I was just curious roughly do you think that would be on Gentex's rate would it be like a one for one impact in terms of every 100 bps in the federal rate or would it be less or?

Kevin Nash -- Chief Financial Officer, Chief Accounting Officer, Vice President of Finance, and Treasurer

Yeah, no, I think that there is lot of speculation about the FDII or the FDII, which is a big benefit to the Company. So if it's a -- if the headline rate just goes from 21 to say 28 [Phonetic], then we would expect it to move linear. But if the rate goes up and FDII goes away, then it's going to be -- it will be a bigger impact on that. So I think we're -- we continue to stay close to it. There is speculation back and forth that the FDII is going away or if there is a replacement for the FDII, but yeah, it would -- if it's just the headline rate, we would expect it to move linear for now.

David Whiston -- Morningstar -- Analyst

Okay. Thanks, guys.

Kevin Nash -- Chief Financial Officer, Chief Accounting Officer, Vice President of Finance, and Treasurer

Thanks, David.

Steve Downing -- President and Chief Executive Officer

Thanks, David.

Operator

Our next question comes from Charlie Sloan with Oak Family Advisors.

Charlie Sloan -- Oak Family Advisors -- Analyst

Good morning. And actually a great quarter. I mean, you guys are amazing in terms of your ability to generate cash during this time. And as you look forward and the Board's tenure around your excitement and enthusiasm around the FDM and your position in the industry, how does the Board look at ASRs or any kind of shareholder or other shareholder purchases as we are going forward?

Kevin Nash -- Chief Financial Officer, Chief Accounting Officer, Vice President of Finance, and Treasurer

Yeah. I think, well, I mean, that focus is very deliberate and very intentional in terms of providing shareholder return as you can imagine. One of the things that we've looked at is, this philosophy in the last couple of years of consistent share repurchases driven around and supported by our estimates of future growth and profitability has given the Board the confidence to say we're going to be aggressive there try to return basically 100% of free cash flow to shareholders in the form of dividends and share repurchases is absolutely our strategy intention.

The one thing I do always abbreviate that with is by saying, if there's great M&A opportunities, the right valuations that are a good fit for the Company those will move up and take the precedence over those prior to. But in the absence of something that we feel very confident about creating shareholder value, we're very confident in our ability to continue to grow the business organically and be very focus -- hyper-focus really on making sure returning capital to shareholders in those two forms.

Charlie Sloan -- Oak Family Advisors -- Analyst

Sure. And then as the management team, how do you look at the current price of the stock knowing that you don't control it -- you just control the fundamentals and the investors control the stock price? But the Board via your -- I think what do you have, just over $0.5 billion in net rainy day funds?

Kevin Nash -- Chief Financial Officer, Chief Accounting Officer, Vice President of Finance, and Treasurer

Yeah.

Charlie Sloan -- Oak Family Advisors -- Analyst

Yeah. Okay. And -- yeah, go ahead, sir.

Kevin Nash -- Chief Financial Officer, Chief Accounting Officer, Vice President of Finance, and Treasurer

Oh, sorry, so I'll speak for myself personally when I talk about the share price. But if you look at what's happened, I felt like right over -- back up three months, four months ago, the price in the $36, $37 range seemed like a very fair price given our trajectory. We look at opportunities like what's happened right now with the retrench and the stock price as an opportunity to get a little more aggressive than what we have been on share repurchases, because we think this is more industrywide background and it's not long-term fundamental issues with the Company.

If you fast forward 18 months, two years, whatever that time period is, if the fundamentals don't change economically, then i.e., there's no recession, cost of borrowing remains low and consumer demand for autos and especially our products remains high. There's no reason why the next couple of years can't be a great growth opportunity and great profitability time for the Company, and so then we think that $32 a share right now is probably undervalued.

Charlie Sloan -- Oak Family Advisors -- Analyst

Well, we would share that opinion and you are in compliance with [Phonetic] your debt covenants, correct?

Kevin Nash -- Chief Financial Officer, Chief Accounting Officer, Vice President of Finance, and Treasurer

Yes.

Charlie Sloan -- Oak Family Advisors -- Analyst

Okay. Because you don't have any debt, right?

Kevin Nash -- Chief Financial Officer, Chief Accounting Officer, Vice President of Finance, and Treasurer

That's correct.

Charlie Sloan -- Oak Family Advisors -- Analyst

Okay. Good. And then second -- lastly, are you going to have any analyst day coming up?

Steve Downing -- President and Chief Executive Officer

No.

Charlie Sloan -- Oak Family Advisors -- Analyst

What's the status of that?

Steve Downing -- President and Chief Executive Officer

Josh and I've been working on that. We were planning one, but then obviously, would still travel...

Charlie Sloan -- Oak Family Advisors -- Analyst

We go [Phonetic] to Grand Rapids, it's hard, it's...

Steve Downing -- President and Chief Executive Officer

Well, and last time, what we were talking about doing one, the next one we will do, we're toying with the concept of doing it in New York again, because it's been a couple of years since we've been able to do one in New York. So we'll -- Josh will reach out to you and let you know, we make firm up those plans. But we've been trying to be -- trying to be reasonable obviously people getting here is difficult and then how do we make sure we're doing something at a time period that's appropriate.

Josh O'Berski -- Director of Investor Relations

Yeah. We would always encourage everybody to take part in CES and join us on the show for there. It's much more fun to actually see and test out our products and [Indecipherable].

Charlie Sloan -- Oak Family Advisors -- Analyst

Right.

Steve Downing -- President and Chief Executive Officer

And you don't have to wait for an Analyst Day. When I come visit West Michigan anytime, you're welcome.

Charlie Sloan -- Oak Family Advisors -- Analyst

Right. I mean, it's pure Michigan. I don't know why the east coasters won't come out, that's a...

Steve Downing -- President and Chief Executive Officer

Exactly.

Charlie Sloan -- Oak Family Advisors -- Analyst

Okay. Thanks guys.

Steve Downing -- President and Chief Executive Officer

Appreciate it.

Kevin Nash -- Chief Financial Officer, Chief Accounting Officer, Vice President of Finance, and Treasurer

Thanks, Charlie.

Operator

We're showing no further questions in queue at this time. I'd like to turn the call back to Josh O'Berski for closing remarks.

Josh O'Berski -- Director of Investor Relations

Thank you everyone for the time and questions today. We appreciate your attention and hope you have a good weekend.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Josh O'Berski -- Director of Investor Relations

Steve Downing -- President and Chief Executive Officer

Kevin Nash -- Chief Financial Officer, Chief Accounting Officer, Vice President of Finance, and Treasurer

Neil Boehm -- Chief Technology Officer and Vice President of Engineering

James Picariello -- KeyBanc Capital Markets -- Analyst

Luke Junk -- Baird -- Analyst

Ryan Brinkman -- JPMorgan -- Analyst

David Kelley -- Jefferies -- Analyst

John Murphy -- Bank of America -- Analyst

Josh Nichols -- B. Riley -- Analyst

Mark Delaney -- Goldman Sachs -- Analyst

David Whiston -- Morningstar -- Analyst

Charlie Sloan -- Oak Family Advisors -- Analyst

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